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Prepare for a rough ride: Costs rise as CBK props up struggling shilling

By Moses Michira | July 14th 2015

Dhillon* arrived at the Jomo Kenyatta International Airport from a work assignment last week to a very welcome surprise.

He walked into a forex bureau at the arrivals terminal and handed the teller a $100 bill he had left over from his travels so he could get shillings to pay for a cab home.

“I was given Sh9,980, which for a moment felt like a mistake,” Dhillon said. This was almost Sh1,000 more than he had received after a recent trip for a similar bill.

The shilling’s sharp slump against the dollar had gifted him the extra cash, but it has had downsides that have huge implications for all sectors of the economy.

The stronger dollar will leave a trail of hardship from the mitumba (second-hand clothing) sector, to the transport sector when, later today, we learn how much of an impact the greenback’s strength will have on the cost of petrol when the Energy Regulatory Commission (ERC) announces new pump prices.

And then there is its impact on borrowers. Last week, several bank customers received news of an impending rise in interest rates on loans, a reflection of the turmoil in much higher levels of the economy.

Nancy* is one such customer, and she is dreading the beating her finances will take.

“I cancelled plans to meet up with my girlfriends and went straight home to sleep after I was notified of a rate increase,” she said.

“It is not the kind of news you would want, not this time.”

It was not immediately clear by how much her monthly repayments would rise. The text message from her bank just read: “As a result of the increase in the KBRR, from 10 August 2015, your applicable interest rate will increase.”

Outstanding loans

KBRR (Kenya Banks’ Reference Rate) is the benchmark rate prescribed by the Central Bank of Kenya for pricing loans given at a floating interest rate.

Nancy’s current monthly repayment is Sh48,529.91, and an increase in this amount was totally unexpected, she said. She had taken a Sh2 million loan to help with the construction of a family home in Rongai in the outskirts of the city.

Hers is just one of the thousands of personal loans outstanding in the local banking sector, with an aggregate value of about Sh1 trillion.

But going by the happenings in the economy in recent weeks, an increase in interest rates was on the cards.

The shilling has lost nearly 20 per cent of its value in less than 12 months against the dollar — the currency in which most exports are paid for.

To curb further devaluation, CBK undertook measures that would attract foreign currency inflows by making the local economy more attractive to investors from international markets.

However, for borrowers like Nancy, who has 37 months left on her five-year loan, these measures are far from welcome.

CBK’s newly appointed governor, Patrick Njoroge, announced last week that the indicative lending rate, the Central Bank Rate (CBR), had been hiked by 1.5 per cent to 11.5 per cent.

The rise came only a month after a similar increase announced by the bank’s monetary policy committee before Dr Njoroge’s appointment.

“In view of the new CBR, the CBK has revised the KBRR, consistent with its commitment in January 2015, from 8.54 per cent to 9.87 per cent,” Njoroge announced on Tuesday, with measures taking effect immediately.

CBK noted that its decision was informed by weak exports, which effectively mean the country was struggling to attract foreign currencies, especially the dollar.

The new rates have raised the cost of funds for commercial banks, as they would have to pay a higher interest rate on customer deposits from which loans are granted to borrowers like Nancy.

“Although we all have our fingers crossed on CBK, it would not be able to arrest the shilling’s slide, mainly because the crux of the problem lies in the pull out of funds by foreign institutional investors, triggered by the expectation that the US will soon start a tightening monetary phase,” said Mohamed Wehliye, a senior vice president at Riyadh Bank.

“It is not as if money is leaving us for higher interest rates elsewhere. It is leaving us for safer grounds, and no amount of interest hikes will arrest the appreciation of the dollar.”

As a result, the pain of a strong dollar is not limited to borrowers. All Kenyans are staring at higher costs of living — individually through higher prices on imported products, and collectively because the national debt just swelled on higher repayments.

Financial experts feel the dipping of the local currency has little to do with happenings in the domestic market, and is more about the strengthening of the dollar globally.

Job Kihumba, the executive director of the Standard Investment Bank, said the most realistic measure to cushion the shilling would be through cutting down on imports and placing emphasis on consuming locally made commodities.

But the country’s heavy investment in infrastructure has seen a sharp rise in imports, including petroleum to machinery.

“It is a very complex situation because we need imports to develop infrastructure, yet we do not have sufficient dollar inflows,” said Mr Kihumba.

He anticipates the fresh foreign investments associated with US President Barrack Obama’s visit will help prop up the shilling.

Foreign debt

On debt repayments, Kihumba said the country would just have to deal with the reality of the growing burden as “the devaluation of the shilling was beyond our control”.

Mr Wehliye added: “In the past, our national debt was domestic biased, but the mix has since changed ... and it is now such that foreign and domestic debt are at 50:50. Debt denominated in dollars is now significant, and this is a big risk if the currency continues to free fall.”

Consider, for instance, the $2 billion Kenya borrowed from the international market in its first Eurobond last year. At the time, the equivalent amount in the local currency was Sh172 billion. Now, the same loan is worth more than Sh202 billion, without considering the interest payable to lenders — currency depreciation has added Sh30 billion more.

To put this figure in perspective, it is more than the Sh25 billion allocated in the Budget to modernise security this financial year, for both the police and military.

And to understand the impact of a weaker shilling on individuals, look no further than the daily consumption of household goods. Retail outlets across the country stock thousands of imported products, most of them made in China.

Monthly purchases from China alone now exceed Sh20 billion. India and the United States follow closely behind, with reported values of Sh15.1 billion and Sh12.8 billion in April, according to the Kenya Revenue Authority.

Exports and remittances

These imports are paid for mostly in dollars, which would be derived from exports and remittances.

But in April, Kenya exported coffee beans worth Sh1.9 billion, Sh8 billion worth of black tea and horticultural produce worth Sh1.5 billion was sold in international markets. These three products earned us a modest Sh11.4 billion in foreign exchange against a total spend of Sh123 billion, according to official statistics.

The mismatch explains why the shilling has come under such intense pressure.

But there is a silver lining for some in a weak shilling. Exporters — such as tea and coffee farmers — are earning more for their products, and this has reflected positively in the stock market. Williamson Tea and Kapchorua gained 10.3 per cent and 10.1 per cent, respectively, to be among last week’s leading gainers at the Nairobi Securities Exchange.

*Last names omitted to protect identities

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